The Relationship Between Current Account Deficit and CBRT Policy Rates After the 2008 Crisis: ARDL and NARDL Bounds Test Approach

Abstract

The current account deficit continues to be a constant problem due to the structural problems of the Turkish economy and the tight monetary policy implemented after the 2008 crisis. Therefore, the measures taken against the current account deficit constitute the priority agenda items of the CBRT. The aim of this study is to comparatively examine the relationship between the current account deficit and the policy interest rate in the inflation targeting and floating exchange rate system using ARDL and NARDL bounds test methods in the period 2011:Q1-2023:Q1. Cointegration test results confirm the existence of a long-term relationship between the variables. ARDL model long and short term coefficients show that the policy rate does not have a significant effect on the current account deficit. NARDL model long and short term coefficients prove that the policy rate does not have a significant and asymmetric effect on the current account deficit. The findings indicate that the expected impact of policy interest rate adjustments on the current account deficit is limited. As a result, it is thought that the reaction of the exchange rate to the policy interest in inflation targeting will be more decisive in keeping the current account deficit at a sustainable level.